Speaking of Tax Policy…

November 9th, 2011 at 2:48 pm

…the Tax Policy Center has a blog up on Mitt Romney’s tax plan. It’s a plan that mostly consists of tweaks to the current system and in this regard is much less ambitious relative to the Cain and Perry plans. The biggest change would be a 10 percentage point cut in the corporate rate from 35 to 25 percent.

But here’s the thing that caught my attention. According to TPC, he’d also

…add a new temporary investment tax credit and allow firms to continue to fully write off the cost of capital investments in the year they make them. He doesn’t say how all this would work, but allowing firms full expensing, adding an investment credit, and letting them continue to take an interest deduction all on the same equipment would result in massive subsidies on capital purchases.

Many economists and policy types on both sides of the aisle love this idea of subsidizing capital spending. The Obama administration has been a big purveyor of accelerated expensing, for example. But I’m worried about it.

There’s some evidence building that the labor-saving characteristics of capital and technology have accelerated in recent years, and that’s one reason why the pace of job growth was so weak in the 2000s, as shown here.

If so—if the pace of substitution of capital for labor has increased; and if, in fact, new technology-enhanced capital is truly more of a labor substitute than a labor complement—it’s not obviously smart from the perspective of job-creation to keep pushing all these tax incentives to make capital cheaper. This is not a Luddite argument—it’s just saying perhaps market forces, untweaked by tax incentives, should play a larger role here.

3 comments in reply to "Speaking of Tax Policy…"

Yes, new technology enhanced capital replaces jobs.
For one simple example, many small bookshops have folded since Amazon came on the scene. And now, Amazon is becoming a digital publisher.
To equate technology that creates code with a Sorcerer’s Apprentice propensity for multiplying itself as equivalent to older industrial technologies is extremely foolish.

Amazon’s capacity to convert digital files into eBook formats is very different from the capital required to build presses, bind, print, and deliver books.

Do we have a good understanding of the sectoral composition behind these trends? It could be that capital is substituting for labor. It could also be that labor intensive work is increasingly being shifted to other countries. Knowing which is driving apparent changes in capital intensity might have large policy implications.